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Will institutional holders begin to follow the activist playbook on their own initiative?
BlogPubCo @ Cooley

To date, for the most part, when it comes to shareholder activism, the heavy lifting has been done by hedge fund activists. Now, as discussed in this NYTDealBook column, institutional shareholders may be stepping out on their own.

Sure, in the last few years, there has been a lot of conversation about institutional shareholders throwing in their lot with activist hedge funds that were making demands on companies they viewed as underperforming. As discussed in this Cooley News Brief, in 2013, companies were becoming more vulnerable to hedge fund activist attacks as a result of the increase in alliances that had sprung up between activists and institutions. One commentator cited in a 2013 article in CFO.com confirmed that “’[t]here is real change in how activists are perceived by the investing public,’…. In the past, if an institutional investor didn’t like a company’s performance or its management team, it ‘voted with its feet’ and sold the shares. But now many investors are ‘more open to outsider influence….They’re willing to concede that a company could be made better through activism, so they are sticking around and voting for changes….As much as management may feel they are being attacked, their shareholders will not necessarily share that view.’” In fact, the article notes, institutions may be more willing to speak candidly with an activist about a company than with that company’s management.

Now, one heavyweight institutional holder may have set foot on foreign territory – literally and figuratively. The NYT column analyzes the “first significant activist campaign” conducted by institutional holder BlackRock, which “has historically shied away from openly challenging companies.” As the column describes it, BlackRock has a reputation as “the pro-company asset manager.” Notably, the objective of the BlackRock campaign is not exactly typical. As described in the column, the campaign was waged against a Hong Kong company, of which BlackRock owned slightly over 9%. The company owned and operated a gold mine, and proposed to sell the mine for its net asset value, apparently a common way to price gold mines. But instead of distributing the proceeds to shareholders, the company announced that it would use the funds to enter, of all things, the investment, financial services and real property investment business. Apparently, BlackRock was none too confident that the transformation would be successful. When the proposed sale transaction was put to a vote of the shareholders (as a sale of almost all the company’s assets), the column reports, BlackRock campaigned against it just like an activist, creating a website, posting an open letter and actively lobbying shareholders and the proxy advisory firms. Although BlackRock lost the vote, the column suggests that “management appeared chastened,” announcing at the meeting that it would consider a dividend of part of the sale proceeds.

The column views the campaign, as unusual as the subject of it was, as significant nonetheless: it demonstrates that “BlackRock is now willing to challenge management openly when the line is crossed…. But the real key is whether institutional investors simply decide to cut out the middleman and start doing their own activism. For now, [the company] is an outlier with a clear case. But the likely future is for institutional investors to become the activists themselves throughout the world. And so, this seems like only a single case, but BlackRock is bound to do more. Companies beware.”

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